FORTUNE — Private equity firm shares have been on a year-long tear, even though yesterday’s headlines were about declines caused by The Carlyle Group’s (CG) earnings miss. Makes me feel much better about my advice last May, which was the only time I’ve even flirted with the hazardous world of stock-picking:
I think there’s potential upside to private equity shares today. Almost every fund manager I speak with believes that harvesting has already begun, and that 2013 will be a bumper crop. Some of them may just be talking their books, but a recent increase in private-equity-backed IPO activity gives credence to their claims (Vantiv LLC, Rexnord Industries, Laredo Petroleum, to name a few). Plus, there is a giant pipeline of portfolio companies that, under more normal economic circumstances, would have been sold between 2009 and 2011.
When publicly traded companies are undervalued, it’s often private equity firms that swoop in to take advantage of the discount. But it’s highly unlikely that Blackstone or its peers will buy back their own outstanding shares, which means that the potential for returns is being left to everyday investors. As your friend, I suggest that you take a good, hard look.
Just take a look at where each of the following stocks opened this morning, as compared to where they closed on Feb. 22, 2012. And, keep in mind, this is in the context of each firm losing ground following the Carlyle announcement:
- Apollo Global Management (APO) +50.57%
$14.16 vs. $21.32 - The Blackstone Group (BX) +20.14%
$15.64 vs. $18.79 - The Carlyle Group (CG) +56.81%
$22 (IPO price from May 2012) vs. $34.50 - Kohlberg Kravis Roberts & Co. (KKR) +17.1%
$14.97 vs. $17.53
Not too shabby…
As for Carlyle specifically, the Q4 earnings miss was largely caused by a deeper-than-expected decline in the rate of portfolio company valuation growth, from 7% in Q4 2011 to 4% in Q4 2012. It also chose to delay collecting carried interest on its current global buyout fund, thus negatively affecting distributable earnings.
Nomura analyst Glenn Schorr was among those who had expected higher earnings, but also said that following: Strong fundraising and realizations, which produced distributable earnings in line with consensus, though ENI missed due to lower-than consensus unrealized performance fees partly offset by better expenses (so just a timing issue with the realizations).”
Carlyle also continues to secure new capital commitments. David Rubenstein said on an analyst call that Carlyle now has closed on around $6 billion for its new flagship private equity fund, which has a $10 billion target.
He also said the following about fundraising: “We’re finally sensing that institutional LPs are at a tipping point of wanting to deploy much more capital into the alternative investment space… We’re also seeing more interest from high-net-worth individuals, and expect this trend to continue.”
In other words, expect fee capital to keep flowing…
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